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Good evening Sir,
Sorry to disturb.I am working the question Arbore Co in BPP kit and I have having issues over two silly things for part a (i):
1) The annuity factor used to discount the net cash inflows for Year 4 – Year 15 for discount rate of 11%. Isn’t it Yr 15 Annuity factor – Year 3 annuity factor (7.191 – 2.444)?
I have read the answer in the kit but I cannot understand why did they multiply the A.F of Year 15 by Year 3 from the P.V to calculate the present value of the net cash inflows.2) For the sensitivity of selling price, I am not sure i can write the answers exactly from the kit here but I calculated sensitivity as follows:
Sensitivity Of sales revenue and then calculated the fall amount in sales in revenue based on the % calculated . Afterwards, divided the fall in sales revenue figure by 300,000 units. And the answer of that representing the fall in selling price per unit.However, the BPP answer is totally different and it is a bit confusing given it is not like a normal sensitivity analysis calculation.
Only these two things I cannot really understand in this question, even if it is very silly given they are rather easy marks.
I would be very grateful if you could help me with these two issues Sir.
Apologies for all the troubles caused.Thank you for your help and guidance Sir.
1. The flows are not 4 to 15. The commence at time 4 and last for 15 years, so they are from 4 to 18.
To discount you either take the 18 year annuity and subtract the three year annuity, or alternatively take the 15 year annuity (because there are 15 years of flows) and then multiply by the 3 year factor (because the annuity starts 3 years late). Both methods will give the same answer (apart from rounding, which is irrelevant).2. For the sensitivity, we divide the NPV (383,000) by the PV of the revenue flows (22,083,588), which gives 1.7%.
Thank you very much Sir. It is much clearer now. Thank you for your help.
Have a good day ahead Sir. 🙂
Sorry John..please can you explain how you got the $22,083,588 figure for the PV of revenue flows?
Thanks,
OliviaWhere are you finding this question?
The reason that I ask is that I am looking at the original exam question and answer and I cannot see a figure of $22,083,588 anywhere in the answer.
I am wondering if you are looking at it in one of the Kits and that maybe they have amended the question (and therefore also the answer)?
Hello John
I have the BPP kit and the answer provided for the sensitivity analysis is quite complicated. I, however, calculated it as follows:
7.191*.PV of sales = 4.2m * 7.191*0.731 = 22,088m
381/22088 *100 = 1.7%
Would answering the question this way be alright?
PS, why is it that in part (b) of the answer, they’ve used 383X5 instead of 381X5?
The NPV of the project is 0.381 m
Regarding the first of your two posts, what you have done is fine (and is what I would have done 🙂 )
As far as your second post is concerned, it should be 0.381 and not 0.383.
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